Dealer Credit Squeeze Part 3

Lead balloon

Part 3

Resellers and Vars have consistently taken advantage of opportunities to release cash principally through invoice discounting, factoring and where appropriate leasing and of course the traditional bank overdraft and term loans.

There are costs attributable to each which have to be borne but the benefits can be substantial by allowing access to funds earlier than through standard credit terms therefore allowing re-invested in the business to drive further opportunities.

Many have taken up invoice discounting facilities. The reasons for this appear relatively simple, banks like to secure loans with a fixed charge over the assets of a company and most resellers don't have or need a significant asset base to operate.

Leasing requires a proposal and agreement with the end user which tends to be effected when relevant to the end user and not necessarily a standard tool that can be used to facilitate supply.

Subsequently, invoice discounting has been on the increase especially in companies with sales of £5m plus. The facility will allow them to receive a substantial proportion of their invoice values within 24 hours of the discounter receiving a copy invoice and the remainder when the end user has paid. The charges for this service tend to be twofold, firstly for the cost of money based on a percentage over the base rate and also a service fee which tends to range between 0.1 to 1% of turnover.

In the past this facility has been another fundamental to allowing growth but in the current market conditions has turned, for some, into a double-edged sword.

By building business projections and expectations at consistently high levels, and releasing cash early in the cycle to re-invest, a number of companies have fallen foul of a sudden downturn or a period of reduced sales volumes. With less cash released into the business and having employed capital to build the business in the first place this has lead to cashflow problems and in some cases failure.

So, what now can be done?

Open book

The channel will need to become more open and less insular, distributors pro-actively work to replace lost credit capacity, the rest of the channel will now have to become more open toward and aware of existing alternatives.

This could result in a more open format when it comes to identifying end-users or accepting a 1-2% charge for working capital finance or offering leasing facilities as part of a standard portfolio. Distributors will need to give serious consideration to when they can step outside of the credit insurance umbrella.

In these cases resellers may have to accept that for this to happen they may have to consider and agree shorter payment terms for example. If the reseller is gaining 80% of the cash for a deal within a few days then why should a distributor prepared to support them not get paid weekly or via direct debit.

Outside of this there is now a massive challenge and opportunity for other credit insurers to enter the market with an effective offering and pro-actively work with the channel.

There are a lot of good solid businesses operating and even though affected by the current market conditions they will survive and move forward. Third parties outside of the channel need to have their confidence renewed that this is the case, but they are going to take a hell of a lot of convincing. ®